I was reading the June issue of Registered Rep Magazine this week when I came across two back to back articles about Exchange Traded Funds (ETFs) both were pretty shocking just because I apparently don’t know much about the topic. The first article highlights concentrated ETFs and the second article was about Actively Managed ETFs. Both articles immediately grabbed my attention since I couldn’t believe how detailed a person could get in their investing technique by using just ETFs.
What is an ETF?
The introduction paragraph and the remainder of the post means nothing if you don’t understand what an ETF is. According to investopedia, an ETF is,
A security that tracks an index, a commodity or a basket of assets like an index fund, but trades like a stock on an exchange. ETFs experience price changes throughout the day as they are bought and sold.
I thought it would be interesting (mainly because I am a personal finance nerd) to name all the ETFs that the magazine did between the two articles.
Examples of Concentrated ETFs
- QQQ – Nasdaq 100 – Aims to include 100 nonfinancial stocks that trade on the Nasdaq; Top 3 holdings, Apple, Microsoft and Oracle represent 27%
- XLV – Health Care Select Sector SPDR – 32% of its assets in 3 stocks, J&J, Pfizer and Merck
- EWZ – iShares MSCI Brazil – 30% of its assets are invested in Petrobas (an oil company) and Vale (a mining company)
- JNK – SPDR Barclays Capital High Yield Bond – Uses a weighting system to provide more weight to those with the most amount of bonds
By purchasing QQQ you are exposing almost 30% of your assets to those three huge holdings and you can do it cheaply without having to worry about fractional shares. Interesting.
Pro: Can get exposure to large, high price per stock companies, and get some diversity while doing it.
Con: One of those heavily concentrated companies tank so do your total holdings.
Examples of Actively managed ETFs
This particular article provides pictures (You may have to zoom in by clicking) and a little blurb about a specific ETF. I have only included the first three as examples:
More than third of Wisdom Tree’s active assets are invested in its Emerging Markets Local Debt Fund (NYSE Arca: ELD), which holds paper issued by more than a dozen Asian, Latin American and EMEA nations.
MINT accounts for 86 percent of PIMCO’s active ETF assets and seeks to generate greater income and total return than money market funds. Most recently, the MINT portfolio’s yield to maturity was clocked at 1.52 percent with an effective maturity of just over 11 months.
The Cambria Global Tactical ETF (NYSE Arca: GTAA) accounts for nearly 60 percent of AdvisorShares’ assets. GTAA is a momentum-following fund-of-funds using multiple asset classes. The fund will either be fully invested in an allocation or will defensively go to cash when momentum reverses from upside to downside.
Pro: Actively managed ETFs have the same pros that actively managed mutual funds have plus they can be traded during the day.
Cons: Many people may assume because it is an ETF it is going to have a lower expense ratio when that may not be the case. Also, it has all the negatives that actively managed ETFs.
Does any experience with either type? I don’t.
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